The Volunteers Have No Clothes

Naked Capitalism asks Why Companies Aren’t Fighting Climate Change, citing interesting new work by Karin Thorburn and Karen Fisher-Vanden, which indicates that firms lose value when undertaking (or at least signaling) greenhouse gas emissions reductions.

Specifically, we studied the stock market’s reaction when companies joined Climate Leaders, a voluntary government-industry partnership in which firms commit to a long-term reduction of their greenhouse gas emissions. Importantly, when the firms announced to the public that they were joining Climate Leaders their stock prices dropped significantly.

Naked Capitalism concludes that, “the stock market doesn’t get it.” Thorburn and Fisher-Vanden actually go a little further,

The negative market reaction for firms joining Climate Leaders reveals that the reduction of greenhouse gases is a negative net present value project for the company. That is, the capital expenditures required to cut the carbon footprint exceed the present value of the expected future benefits from these investments, such as lower energy costs and increased revenue associated with the green goodwill. Some may argue that the decline in stock price is simply evidence that the market is near-sighted and ignores the long-term benefits of the green investments. Notice, however, that the stock market generally values uncertain cash flows in a distant future despite large investments today: earlier work has shown that firms announcing major capital expenditure programs and investments in research and development tend to experience an increase in their stock price. Similarly, the stock market often assigns substantial value to growth companies with negative current earnings, but with potential profits in the future. In fact, only two percent of the publicly traded firms in the United States have joined the Climate Leaders program to date, supporting our observation that initiatives aimed at curbing greenhouse gas emissions largely are value decreasing.

I personally don’t drink enough of the economic Kool-aid to take it on faith that market perceptions are consistently right. For one thing, high oil prices haven’t been around for very long, which means that firms haven’t had a lot of time to take profitable actions. Markets haven’t had a lot of time to believe in the staying power of high oil prices or to separate the effects of firms’ energy and carbon efficiency initiatives from the noisy background. Expectations could easily be based on a bygone era. However, even if there are some $20 bills on the sidewalk at present, Thorburn and Fisher-Vanden are certainly correct in the long run: emissions reductions will entail real costs at some point.

So what does this all mean? In a nutshell, it suggests that the federal government’s reliance on voluntary measures to reduce greenhouse gas emissions will likely prove unsuccessful.


Stock market measurements may miss one important feature. Capital markets disproportionately contain the future losers from climate policy (e.g., a carbon tax), who have real incentives to avoid costly action. The future winners, on the other hand, are to some extent invisible at present. It will take time for them to thrive and grow. More importantly, it will take internalization of the climate externality and many other institutional changes, which the incumbents will oppose, unless they can imagine a path for their own transformation into winners.

It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries, who have the laws in their favour; and partly from the incredulity of mankind, who do not truly believe in anything new until they have had actual experience of it. Thus it arises that on every opportunity for attacking the reformer, his opponents do so with the zeal of partisans, the others only defend him half-heartedly, so that between them he runs great danger. – Niccolo Machiavelli, The Prince

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